1. Helping Create Places for Healing
Monetization Trends
in Health System and Physician-Owned Real Estate

2. 2Realty Trust Group Monetization trends |
Prior to 1997, most hospitals and health systems
owned their facilities and had relatively little
incentive to monetize assets under Medicare’s
cost-based reimbursement program.
With the introduction of the Prospective Payment System
in the early 1980s and the eventual elimination of cost-based
reimbursement in the late 1990s, the way in which health
systems viewed their “non-core” properties fundamentally
changed. Many progressive health systems, including some of
the major Catholic systems (Catholic Health East, the former
Catholic Healthcare West, Ascension, SSM) and other large,
prominent systems (Baylor Health Care System, Swedish
Healthcare, IU Health, Orlando Health and Carolinas HealthCare
System), systematically monetized billions of dollars of MOBs
between 1997 and 2008. These organizations realized that
the capital returns associated with operating their real estate
portfolios were often far lower than the hurdle rates required
for investment elsewhere within their organization. The
financial theory behind these transactions became one of re-
deploying low-yielding capital tied up in bricks and mortar for
higher returning investments in equipment, new services and
acquisitions.
With respect to real estate linked with private physician
practices, especially the concern about physician self-referral
and potential penalties associated with the introduction of the
Federal Anti-Kickback laws in 1972 and the Stark laws in 1992
and 1993, many health systems became increasingly uneasy in
their role as landlord to their referring physicians. Errors of both
omission and commission can trip these statutes and result in
fines and penalties, as well as potentially losing future Medicare
reimbursement eligibility. The threat of these penalties
increased some providers’ desire to remove themselves from a
landlord position with their physician tenants.
As capital demand for information and medical technology, physician alignment
and other initiatives becomes more persistent, health systems are once again
pursuing strategies to unlock equity from existing non-core real estate assets,
as well as utilizing new vehicles in the form of third-party capital partners for
new facility development projects. In addition to health systems, many large
physician groups which have elected to own their real estate for business reasons
are frequently dealing with similar issues as they align with hospitals and health
systems in record numbers. The physician groups may be required to relocate or
sell their owned medical office space prior to the affiliation for either regulatory,
business or strategic reasons. This Realty Trust Group white paper explores the
history of these transactions, summarizes current activity and the benefits for the
owner/ seller, and looks ahead at what the future may bring in this sector.
Monetization Trends
in Health System and
Physician-Owned Real
Estate
Historical Trends
$-
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Billions $ Volume
Source: Real Capital Analytics
The use of third-party capital
for facility development and
monetization has increased
fairly dramatically over the
past 20 years, exemplified
by this chart (shown right)
which tracks medical office
transaction volume between
2001 and 2012.

3. 3Realty Trust Group Monetization trends |
The emergence of an institutional investment market generally
coincided with the regulatory changes occurring in the industry.
Prior to the mid-1990s, there were very few pension funds,
insurance companies, real estate investment trusts and other
large, public or private investment vehicles that were interested
in investing in medical real estate. However, institutional capital
funds continued to grow at an increasing rate, and after a few
of the early monetizations were completed in the late 1990s,
institutional investors relatively quickly became enamored with
the solid fundamentals that healthcare investments provided.
As noted in the preceding chart, transaction volume generally
rose every year since statistics have become available.
The music stopped, though, with the financial
implosion in late 2008.
Carolinas HealthCare System closed their 15-building MOB
portfolio with Healthcare Realty Trust in December that
year, and then there was only one major hospital-sponsored
portfolio transaction in 2009 and 2010. Health systems were
faced with crashing investment portfolios, early-wave EHR
implementation, large scale physician acquisitions and a myriad
of other strategic and operational issues during this challenging
period. Real estate plans for new development and monetization
gathered dust.
However, over the past 18 months or so, there have been multiple
hospital and physician-sponsored MOB portfolios which have
traded, and several others which are either under contract or
currently being marketed, including:
• Denver-based Centura Health sold a 317,026-SF
portfolio in late 2011
• In early 2012, Bethesda Healthcare in Palm Beach,
Florida sold a 133,473-SF medical mall
• Northside Hospital in Atlanta sold two MOBs on its
Alpharetta campus, totaling 287,191-SF
• The Harbin Clinic, situated on the outskirts of metro
Atlanta, recently sold a seven-building portfolio totaling
333,581-SF
Changes in the Air
Although there is clearly some uncertainty about the future
operating rules under the Patient Protection and Affordable
Care Act, there is also a desire for many health systems and
physician groups to move forward with their strategic real estate
plans.Patientpopulationscontinuetogrowandrequireservices,
and demand for new facilities and programs is increasing in
many markets.
The management consulting firm FMI, in its
Construction Outlook published in early 2012,
projected that health care construction would
grow at an average rate of 9.9% between 2013
and 2016.
So, too, is the demand for capital to fulfill the organizational
mission, and thus more use of third-party capital for real estate
needs. Further, third-party capital is currently priced at relatively
inexpensive levels, providing organizations with efficient
alternatives to using internal capital or accessing the tax-exempt
bond market (fornon-profithealthsystems) or the equity market
(for for-profit health systems). Even though strong NFP credits
can currently borrow in the tax-exempt market at historically
low rates, the enterprise still must apply some cost associated
with the use of their “equity” capital— even NFP health systems
can’t be funded 100% with debt. With the weighted average cost
of capital for most large organizations lying somewhere in the
8–15% range, third-party real estate investors and developers
that will provide capital in the 6-9% range can be attractive to
hospitals and physician groups.
As will be discussed later, there is one monetization vehicle that
is relatively new to the health care industry which is potentially
even more attractive than some of the conventional third-party
capital models described above.
This inexpensive debt capital is also having an impact on current
pricing of properties. The high-water mark for pricing and
valuations of medical real estate came between late 2007 and
late 2008, before the market crash.
Historical Trends (continued)

4. 4Realty Trust Group Monetization trends |
As noted earlier, there are two primary reasons why health
systems and physician practices monetize real estate. First, the
capital generated from the transaction can be re-deployed at a
higher rate of return. Second, this type of transaction can result
in significant balance sheet improvement.
Additionally, for hospitals, a monetization transaction removes
the burden of being a landlord to the tenant physicians, thereby
neutralizing penalties which could be suffered as a result of
running afoul of the Stark or Anti-Kickback rules. In addition
to these drivers, there are a series of other benefits which can
accrue to a health system or physician group in monetizing a
real estate portfolio.
These benefits can include:
• Transferring the burden of managing and accurately
accounting for operating expenses of the real estate
portfolio
• Possible avoidance of certain capital expenditures
associated with the portfolio
• Maintaining or improving system credit rating
• Reduction of management time on real estate issues
When a true third party takes ownership of a portfolio, the
expenses and capital expenditures required to maintain the
buildings move along to the new owner as well. Certain lease
structures may require tenants to continue to pay all or a
portion of the operating expenses, but a new owner would likely
bear some of the burden for operating expenses and capital
expenditures, thus relieving the hospital or physician group from
these costs.
From a credit rating standpoint, the ratings
agencies have generally been neutral to slightly
positive about monetization transactions, often
favorably citing the increased liquidity they
provide to a system.
There are multiple challenges as well, including the potential
transitioning of the property management function. Health
system executives worry about third-party owners potentially
damaging their relationship with their physician tenants, but
frequentlythird-partyownerscanprovideanenhancedproperty
management experience for tenants due to their expertise
in medical real estate management. The flexibility of moving
tenants within a building could be diminished with a third-party
owner, but can often be addressed by proper covenants in a
ground lease.
Benefits & Challenges
Changes in the Air (continued)
Althoughmanyoftheotherrealestatesectorsarestillrecovering
(including the residential market), medical real estate pricing
has now returned to the point where most properties and
markets are emulating, or are near to emulating, the peak pricing
experienced before the downturn.
Institutional investment capital has once again begun to flow
strongly into the medical real estate sector, creating a short-
term supply / demand imbalance between the capital and
available properties in which to invest. Simple economics
suggests that prices will remain high for some period, until this
imbalance changes. Thus, more owners are taking advantage
of the currently favorable market conditions, and monetizing
portfolios of properties.

5. 5Realty Trust Group Monetization trends |
Structures Utilized
There are three primary structures that have been used in most of the portfolio monetizations: a sale to a third party, with the seller
leasing back a portion of the space; a sale with the seller master leasing back all of the space; and a joint venture. Each of these
structures provides unique “benefits” and “burdens”, as summarized below:
Benefits
• Allows hospital / physicians to retain partial
ownership of the assets
• Hospital may maintain certain controls through
properly-executed ground lease or other
restrictive covenants
Burdens
• Provides less than 100% of the value of the assets
• More complex transaction than other two
structures
• Interest in property is relatively illiquid
Benefits
• Provides 100% of the market value of the facilities
• New owner responsible for property management
and capital expenses
• Removes hospital from landlord / tenant
relationship
• Hospital shifts leasing risk for vacant space to
new landlord
• Hospital may maintain certain controls through
properly-executed ground lease or other
restrictive covenants
Burdens
• Introduces third party into hospital / physician
relationship
• Complete control of space is reduced
SALE/LEASEBACK
Sale/MASTER Leaseback
Benefits
• Provides 100% of the market value of the
facilities; proceeds may be higher than traditional
SLB
• More control over leasing and property
management than traditional SLB
• Hospital may maintain certain controls through
properly-executed ground lease or other
restrictive covenants
Burdens
• Does not remove hospital from landlord / tenant
relationship due to sublease arrangements
• Hospital maintains leasing risk for vacant space
Joint Venture

6. 6Realty Trust Group Monetization trends |
A “New” Structure
Physician Transactions
A relatively new structure for real estate transactions in the
health care industry is the use of Credit Tenant Lease (CTL)
financing, which is currently available for “A” and “AA”-rated
credits. This structure has been utilized in other industries for
years, but has only recently found its way into the health care
industry.
Essentially, CTL financing is an alternative to the tax-exempt
bond market, or the other structures described earlier. It
provides up to 100% financing for existing and to-be-developed
projects at extremely attractive, long-term fixed rates—at or
near what could be achieved in the tax-exempt market. This
structure works best for single tenant, core facilities which the
health system expects to occupy for an extended period. As
noted above, it can be used to monetize existing facilities or for
new development projects. The financing rates associated with
these transactions are currently far lower than a comparable
sale-leaseback.
The typical structure involves the hospital setting up a single
purpose entity which would maintain control of the property
throughout the 20+ year lease term. A CTL lender / investor
would fund the transaction, which would be paid back subject
to a lease, which effectively serves as a self-amortizing loan. The
lease payment would be based on a Treasury benchmark plus
a spread, with no annual escalations. The final terms would be
subject to the hospital’s credit, the size of the transaction, the
type of facility involved and the current market conditions. The
term of the financing would be coterminous with the lease.
This structure is rapidly gaining favor with strong
credits as a way to leverage their financial strength
and utilize alternative, more cost-effective capital
sources for specific real estate assets.
While the majority of the real estate monetization activity that
has occurred has been between health systems and investors,
there are many factors influencing larger physician practices
to consider monetization alternatives as well. Several of those
factors are consistent with trends driving the monetization
activity for health systems, such as the current pricing levels
influenced by the imbalance between supply and demand and
the opportunity for affordable third party capital.
Similar to health systems, large physician groups are feeling
the pressure of increased capital constraints, in addition to
decreasing reimbursement trends. Now more than ever, it is
critical for physician practices to invest their capital in areas of
their business that provide the highest return (e.g., physician
recruitment, medical equipment, etc.).
In addition to the issues discussed above, there are other factors
unique to physician groups which should be considered by
physician owners in their monetization decisions. First, the wave
of physician employment and/or alignment with health systems
continues at a rapid pace, and this trend is not expected to
end anytime in the near future. More physician practices with
large real estate portfolios are seeing their real estate either
significantly complicate a potential acquisition / alignment or, in
some cases, completely prevent the transaction from occurring.
By divesting their real estate portfolio, physician practices
can potentially become more attractive from an employment
perspective, since a divestiture would eliminate potential
Stark / Anti-Kickback real estate-related issues.
Additionally,itisverycommonforphysician-ownedrealestateto
be held outside of the actual operating entity and, as a result, the
physician owners are typically required to carry recourse debt
on the properties. Given the uncertainty within the traditional
financing markets and the inevitable increase in interest rates,
many physicians are not willing to be exposed to such severe
potential refinancing risks, both from interest rate fluctuation as
well as potential debt-to-equity requirement changes.
As mentioned earlier, the Harbin Clinic, which is the largest
multi-specialty physician practice in Georgia, recently decided
to take advantage of the market conditions and monetized the
majority of its real estate portfolio, including seven buildings
consisting of 333,581 square feet. The Clinic’s main reasons for
monetizing were to free up capital for its physicians, mitigate
substantial future refinancing risks, remove itself from the real

7. 7Realty Trust Group Monetization trends |
Physician Transactions (continued)
Conclusion
estate property management business, and become a leaner,
more flexible organization from a balance sheet perspective. All
of these objectives were accomplished by entering into a sale /
leaseback with a large health care real estate investment trust.
Similar to sale / leaseback transactions between institutional
investors and health systems, physician practices can often
accomplish similar objectives from a control standpoint through
certain covenants in the lease or ground lease agreements.
ABOUT REALTY TRUST GROUP
Since our inception in 1998, Realty Trust Group has become
one of the most experienced and knowledgeable real estate
advisory firms in the healthcare industry.
RTG has offices in Knoxville, Tennessee and Atlanta, Georgia,
and has completed projects for clients in 23 states. We
serve hospitals, health systems, physician groups and other
owners, users and investors of healthcare real estate. Our
philosophy is to provide innovative solutions to the complex
and challenging issues found in today’s healthcare real estate
market. These solutions include strategic campus and facility
planning, portfolio optimization, portfolio monetization,
project development, site analysis and acquisition, asset
management, fair market value opinions and many other
ideas and services.
For more information about our firm please visit our website
at www.realtytrustgroup.com.
With demand for capital to grow and implement the changes required of the Affordable Care Act
continuing to stress providers’ abilities to fund new initiatives, along with a market which is currently
very attractive for sellers, several recent medical real estate portfolios have been monetized. Health
systems and physician groups considering a monetization effort need to be aware of the issues which
can impact them post-transaction, and fully understand the strategic and financial benefits which can
occur as a result of a successful transaction.

8. Real Estate Advisors to the Healthcare Industry
In the end, our work is about
putting patients together with
their healthcare providers.
www.RealtyTrustGroup.com
Scott Evans
Executive Vice President
sevans@realtytrustgroup.com
1100 Johnson Ferry Road
Building 1 – Suite 400
Atlanta, GA 30342 • 404.402.5503
Greg Gheen
President
ggheen@realtytrustgroup.com
One Cherokee Mills
2220 Sutherland Ave.
Knoxville, TN 37919 • 865.521.0630